Ballyhoed New CAFE Standards Riddled With Hummer-Sized Loopholes

When Obama unveiled new fuel standards we decried the end of fun cars and pointed out how far most automakers are from meeting new-for-2016 fuel standards. It turns out, thanks to Hummer-sized loopholes like your car's air-conditioning, automakers should be able to meet them with little fear.

At issue is the federal government's twin towers of regulation power — the National Highway Transportation and Safety Administration (NHTSA) and the Environmental Protection Agency (EPA). What President Obama announced Tuesday was that the EPA and NHTSA intend to work together to regulate greenhouse gas (GHG) emissions and corporate average fuel economy (CAFE) standards at the national level. This avoids different standards being implemented at the state versus federal level, and to avoid unharmonized or inconsistent GHG emission and CAFE standards.

The problem is, as has been widely reported by everyone in the media, ourselves included, NHTSA is not proposing a 35.5 MPG CAFE standard by model year 2016. Rather, as we're now being told by analysts at Credit Suisse, the EPA intends to propose GHG emission standards that, based on its estimates of model year 2016 light vehicle sales at that time, would result in fleet average CO2 emissions (of vehicles sold in that model year) of roughly 250 grams/mile. This creates at least one huge loophole in the system for automakers to take advantage of.

The Air Conditioner Loophole
That level of CO2 emission per mile would equate to about 35.5 MPG in fuel economy parlance. However — here's the big loophole — it's expected by the EPA and NHTSA that most manufacturers would apply air conditioning improvements to reduce GHG emissions. Air conditioning improvements do not enter into the NHTSA's calculation of MPG fuel economy.

Thus, the improvement in MPG that is equivalent to the estimated 250g of CO2/mile will actually fall well short of the 35.5 MPG mark. The gap between what the fleet CAFE will be and the widely reported 35.5, would be made up by air conditioner improvements. So basically, when you buy your supposedly more-fuel-efficient vehicle in 2016, it won't have as high of a fuel economy as it could — thanks to your car's air conditioning.

Automakers Get Lower Standards The More Large SUVs, Trucks They Build
Credit Suisse also points out in a new report released today that another key component of the proposal yesterday is that the EPA and NHTSA both intend to propose separate footprint-based standards. This is consistent with NHTSA's current approach to CAFE standards and, as such, means that there will be no set standard, with respect to either CO2 or fuel economy, for any single manufacturer or in fact for the fleet as a whole. Any standards you hear about for a given manufacturer or for the fleet as a whole are estimates.

This is because the actual MPG or CO2 "standard" for every manufacturer will vary depending on what they build. Footprint-based means the amount of CO2 emitted and the level of fuel economy will vary depending on the vehicles wheelbase multiplied by its track width. Put another way, the area between where the tires touch the road.

This quote from the proposal addresses the implications for automakers: "Under a footprint-based standard, each manufacturer would have a GHG and CAFE standard unique to its fleet, with a separate standard for passenger cars and light-trucks, depending on the footprints of the vehicle models produced by that manufacturer. Generally, manufacturers of larger vehicles (i.e. vehicles with larger footprints) would face less stringent standards (i.e., higher CO2 grams/mile standards and lower CAFE standards) than manufacturers of smaller vehicles." This clearly favors the domestic makers.

Will That Be Cash Or Credit?
The EPA and NHTSA foresee flexibility in compliance with its proposed standards based on certain credits. Credits can be earned for fleet over-compliance in a given year, and applied in future years. Current consideration is to allow credits to be carried forward for at least 5 years.

In addition to credits at the fleet level that could be carried forward, the agencies intend to consider giving manufacturers the ability to transfer credits among its fleet. That is, if an automaker achieves over-compliance on the car side, it can transfer those credits to the truck side, and vice versa.

Air conditioning credits: AC units contribute to GHG emissions in two ways. First, through the leakage of hydrofluorocarbon (HFC) refrigerants, and second, by placing additional load on the engine, which causes the engine to produce additional CO2. The EPA is considering an approach that would enable automakers to earn credits by reducing GHG emissions (HFC and CO2) related to AC systems. Under the approach, reductions in HFCs would be converted to a CO2 equivalent reduction on a gram/mile basis that could be used as credits in meeting fleet CO2 standards. The EPA said it believes automakers would reduce HFC and CO2 emission through AC upgrades in order to take advantage of these credits.

Additional credit opportunities are being considered to help promote the commercialization of electric and plug-in hybrid electric vehicles. They are called "super credits", and they would take the form of a multiplier such that the number of hybrid/electric vehicles sold would count as more than one vehicle in the manufacturer's fleet average. Thus helping automakers achieve fleet compliance by offering such vehicles, and applying those credits as needed.

Who Comes Out On Top?
All of this doesn't mean the automakers won't have to make an improvement. There's still much work to be done to bring all the vehicles up to these standards, but as we learn more it becomes clearer why so many auto execs were willing to stand behind President Obama.

[Credit Suisse, EPA, Green Car Advisor]